AN APPRAISAL OF THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE NIGERIAN ECONOMY.
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AN APPRAISAL OF THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE NIGERIAN ECONOMY.
CHAPTER 1.
BACKGROUND FOR THE STUDY
1.1 Introduction.
The current global financial crisis, unprecedented in modern history, has been regarded as Wall Street’s most severe crisis since the Great Depression in October 1929.
From the Wall Street financial headquarters in the United States to Europe, Japan, and China, the global financial system that underpins the modern free market economy and capitalism is collapsing like a house of cards.
The long-brewing financial crisis began to take effect in October 2008. Around the world, stock markets began to tumble as billions of mortgage-related assets failed.
Mighty investment banks that formerly dominated the financial world, such as Lehman Brothers and Merrill Lynch, have either collapsed or rebuilt themselves as ordinary commercial banks.
The current global financial crisis can be traced back to the consequences from US subprime mortgage lending, which began in early 2007. It quickly extended to other markets and economies as a result of market failures and regulatory flaws.
In general, the market failed due to ineffective corporate governance and incompatible CEO compensation schemes. Furthermore, large financial institutions’ lack of openness about trading procedures, financial instruments, and balance sheet positions aggravated market failures.
Most countries have limited unique regulations governing the functioning of trading instruments and financial conglomerates. Poor capital regulation and accounting regulations contributed to banks’ excessive risk-taking. Furthermore, several rating organisations did not fall under the jurisdiction of national authorities.
This resulted in the entire failure of short-term financial transactions in leading advanced and emerging market economies, as well as a meltdown in global securities exchanges. With interbank lending and money markets frozen, capital could not be channelled to economic agents functioning throughout the industrial chain.
However, there are many shared perspectives on the reasons of the current economic crisis. These include homeowners’ inability to make mortgage payments, poor judgement by borrowers and/or lenders, boom-era speculation and overbuilding, risky mortgage products, high levels of personal and corporate debt, complex financial innovations, central bank policies, and government regulation.
The significant decline in housing prices resulted in delinquencies in mortgage payments and foreclosures in the United States, which had a knock-on effect on the financial market and global banking systems, as investments related to housing prices fell significantly in value, putting the health of key financial institutions and government-sponsored enterprises at risk.
Dominique Strauss-Kahn (2008) stated, “At the heart of the problem were falling house prices in the United States and the resulting loss in the value of securities linked to mortgage liabilities.” Too many high-risk mortgages were granted. It worked for a while and resulted in significant earnings, but ultimately, negligence led to the disaster.”
It is worth noting that this chaotic financial time is not exclusive to the United States. The world has become a global village, linked together by telecommunications and technological advances.
This is a strong proof that the global economy is interconnected; thus, what affects one country immediately or indirectly affects another. Nigeria’s economy, as a developing country, is heavily reliant on the economies of several overseas established countries, which are currently suffering from the global financial crisis.
As a result, it is critical to assess how the global economic downturn may influence important sectors of the Nigerian economy. Since the beginning of the present global financial crisis, concerns have been raised about its potential impact on our economy, particularly the banking sector.
According to Soludo (2008), the crisis will not have an impact on Nigeria’s economy. He maintains that the banking consolidation initiative was a preventative move before to the crisis. So Nigerian banks were among the best capitalised in the world.
Without prejudice to the assurances given by Central Bank of Nigeria (CBN) officials that the economy is immune to the global financial crisis, there is a need to critically examine the broader implications of the crisis, which has ravaged not only our economy but also developed economies in the United States, Europe, and Asia.
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